Call Butterfly Spread Strategy

The Call Butterfly Spread is a neutral options strategy designed to profit from minimal price movement in the underlying asset. It combines elements of both bull and bear call spreads, using three strike prices and four call options with the same expiration. Traders use this strategy when they expect the stock to stay near a specific price at expiration, benefiting from time decay and a drop in volatility.

Structure

• Buy 1 lower strike call (long wing)
• Sell 2 middle strike calls (short body)
• Buy 1 higher strike call (long wing)
• All options share the same expiration date

Profit & Loss Profile

• Max Profit: Achieved if the stock closes at the middle strike at expiration
• Max Loss: Limited to the net debit paid to enter the trade
• Breakeven Points: Lower strike + net debit and Upper strike − net debit

Ideal Market Conditions

• Neutral outlook with low expected volatility
• Best when implied volatility is high at entry and expected to decline
• Use when the stock is expected to stay near the middle strike price

Example

A stock is trading at $100. You:

• Buy 1 call at $95 for $6
• Sell 2 calls at $100 for $3 each
• Buy 1 call at $105 for $1

Net debit = $1. If the stock closes at $100, the short calls expire worthless and the $95 call is worth $5. After subtracting the $1 debit, your profit is $4.

Risks & Considerations

• Requires precise price targeting for max profit
• Assignment risk on short calls if in-the-money
• Time decay and volatility shifts can impact profitability